There has been an accepted model for western expatriate wealth in the Gulf for many years: people go there, earn their money, then take it home again.
It works at both individual and institutional levels – even the biggest private bankers and fund managers tend to pitch up in Dubai and Abu Dhabi to remove money from the Gulf and invest it elsewhere.
| Expatriate IFAs and product providers are moving quickly to respond to client demand|
Perhaps this is changing. In November Invesco launched the latest instalment of its increasingly comprehensive Middle East surveys. Beyond all the headline conclusions – private capital entering the UAE from Russia and Africa, political stability driving flows – lies an interesting graph 31 pages in. It shows how western expatriate allocations to the GCC and Mena region, which stood at a negligible 2% of assets in 2011, now stand at 13% of assets.
Why? “Not only are investors becoming more comfortable with the region, but it’s a reflection of the advisory market as well,” says Nick Tolchard, head of Invesco Middle East. “Product providers are expanding their range to include more local investment.”Indeed, there are two elements at work here, and the sense of confidence in the viability of local markets, perhaps particularly in volatile boom-and-bust Dubai, is only one of them. Just as important, and long talked about, is the gradual development of an independent financial adviser (IFA) culture in the Gulf, and in particular in the UAE where wealthy expatriates tend to be concentrated. It seems expats are much happier going through a financial adviser than trusting the product sales team of a local bank.
Generally, the arrival of an IFA sales force tends to have an impact on the sort of products that clients end up buying. Invesco’s research shows, for example, that there is a marked difference in the average product allocation between IFAs and banks in the Gulf. In 2014, 83% of IFA sales are life and pension products, and even that’s a considerable decline from 94% in 2011; only 9% goes into direct securities, and 6% mutual funds. Compare this to the bank sales channel, through which 34% of sales go in direct securities, 33% mutual funds, 12% structured products and 22% life and pension products. Also, bank channels – particularly private banks – are much more likely to use leverage than IFAs.
Nevertheless, Tolchard expects a gradual convergence in asset allocation between these channels. “Expatriate IFAs and product providers are moving quickly to respond to client demand for investment guarantees, more flexible time horizons and greater local, regional and Indian investment options,” he says.
What would be really interesting is if the institutional market followed this gradual retail lead. Very little passive money makes its way here – only Qatar and the UAE appear in the MSCI Emerging Markets index, and they only very recently and in modest size – so a commitment of capital to the Middle East remains very much an off-index bet. In terms of private capital, Invesco found that most GCC countries were experiencing net outflows in 2014.
Still, there was one exception, and perhaps this provides a point for the future: the UAE, which saw total private capital inflows of 81% on a net respondent view basis, more than half of it coming from emerging markets, with a particular focus from Russia.
Tolchard says that 30% of respondents, when asked, said political stability was the most important factor behind their decision. The UAE already gained a lot of assets from the region as the turmoil of the Arab Spring washed through – it is seen as unlikely to experience volatility itself – and it is also perceived to offer attractive investment opportunities with a respected local regulatory environment.
“The fact that many respondents attributed capital inflows to local investment opportunities shows that the UAE is becoming an increasingly attractive investment destination in its own right,” says Tolchard.
Perhaps we are seeing the first signs of capital flows involving the Gulf being something other than a one-way street.